Came: as shareholders will rescue the largest Russian automobile plant

On Friday morning AVTOVAZ has published the statements under IFRS for the year 2015. The plant received a record loss — 73,9 billion rubles, which Is three times more than in 2014. Loss from operating activities increased more than eightfold, to 66.8 billion rubles. AVTOVAZ Auditor Ernst&Young in prison to published statements have expressed doubt that the company will be able to continue as a going concern. “These conditions along with other circumstances indicate the existence of material uncertainties that may cast significant doubt in the ability of JSC AVTOVAZ and its subsidiaries to continue its operations continuously”, — said in the conclusion.

What does the auditor report?

Director General of audit company “2K” Tamara Kasyanova notes that this clause means that the creditors of the company may simultaneously present debt to be paid, and the company will not be able in a short period of time to repay. Then AVTOVAZ can be sued for recovery of a debt. “Considering the current situation on the market, this is not a unique story. After the collapse of the “Transaero” the auditors were safe,” — says Kasyanov.

As AVTOVAZ was in such a bad financial position?

The main reason for the loss of AVTOVAZ — low sales of its main models of Lada. In 2015, sales of Lada fell by 30.5% compared with 2014, to 269 thousand cars. At the same time, AVTOVAZ was the leader of the Russian market in the growth of prices for cars: according to PwC, the most popular Lada models in 2015 rose by an average of 13%. As a result the most popular model of the factory — Granta — last year I almost lost leadership in the market of Hyundai Solaris Korean: a year in Russia has sold 120 thousand and USD 115.9 thousand Granta Solaris. In the same year, Granta ceased to be the cheapest car on the Russian market. Price from 348 thousand rubles for this indicator, the car VAZ loses Lifan Smily (319 thousand rubles) and Daewoo Matiz (314 thousand rubles.).

AvtoVAZ had hoped to rectify the situation at the end of the year due to the explosive demand for its new model of Vesta, the sales of which started on November 24. By the end of the year, the plant planned to sell 5-6 thousand Vesta, but sold only 2,8 thousand the Dealers explained to the poor demand for the car price, which was close to its key competitors in the segment, Hyundai Solaris, Kia Rio and Volkswagen Polo. As a result, in regions which for AVTOVAZ are the primary market, the sale of Vesta was lower than expected.

Another cause of losses is the growth of prices for materials and components, which account for 74% of the cost of AVTOVAZ. Every 1% increase in the cost of components is about 1.6 billion rubles of expenditures, and opened up the plant in the report for 2014. Also the loss was influenced by the decrease of the average rate of the ruble by 33%, increase in interest rates of banks “worse than our expectations” and accounting write-offs and restructuring costs of business in the amount of 42,1 billion roubles, is spoken in the accounts of AVTOVAZ.

How critical the situation of AVTOVAZ?

In reporting AVTOVAZ indicated that on December 31, 2015, violated the financial conditions (covenants) on loans 36.6 bn from 174 billion rubles of the total debt. The Covenant violations theoretically allows creditors to demand early repayment. Guarantees discourage early recovery of these loans from 36.6 billion rubles. AVTOVAZ received only 2.7 bn from three banks — ROSBANK, “Garanti Bank Moscow” and Societe Generale, said in a statement.

The largest creditors of AVTOVAZ, Sberbank, VTB and the Bank, controlled by one of the shareholders of car factory — “Rostechnadzor”. “The situation has arisen not yesterday, but still plans to demand early repayment no: if we ask, AVTOVAZ will face bankruptcy,” says a source in the Bank. A source at another major banking institution says that to require early repayment will never allow the government. “AvtoVAZ is a bona fide borrower of the Bank, and at the moment we have no claims to the company”, — said the press service of VTB.

The analyst of “VTB Capital” Vladimir Bespalov agrees that, despite the high level of debt, the situation of AVTOVAZ is not critical. “A large part of the debt of AVTOVAZ as interest-free loans, the rest falls on the shareholders and the banks. AvtoVAZ has repeatedly reported about the margin call, but none of the creditors never demanded early repayment of the loans. With this structure a debt default AVTOVAZ is not threatened,” he says. However, it can not continue. “Until the situation is under control, but if the market is going to fall for another two or three years, all the while close losses will become impossible,” warns Bespalov.

That will make the automobile to remedy the situation?

In the current environment the need help AVTOVAZ shareholders, says analyst “VTB Capital” Vladimir Bespalov. In the accounts of AVTOVAZ said that the company has asked the owners for help: “the Group is currently negotiating the involvement of various funding sources, including by obtaining additional loans from shareholders”.

The main shareholder of AVTOVAZ (74,51% stake) — company Alliance Rostec Auto BV. She 67,13% owned by the Renault-Nissan Alliance, and 32,87% — the state Corporation “rostec”.

The owners of AVTOVAZ has already expressed readiness to help him. Renault, whose plant in 2015 brought a €91 million loss, on Friday reported that it had entered into discussions with other shareholders of the Tolyatti factory of additional capitalisation. “As a result, the loans and receivables are capitalized and will be considered as part of additional issue at 31 December 2015”, — stated in the message of Renault. After this, Renault will become the controlling shareholder of AVTOVAZ. Whether to participate in the additional issue by Nissan, not clear: the representative of the group declined to comment.

In “assistance” confirmed that the Corporation together with shareholders of Alliance plans to participate in the financial restructuring of AVTOVAZ. “As a possible scenario includes recapitalization by depositing additional funds in the company’s share capital and conversion of debt,” — said in “assistance”. While the Corporation intends to keep its stake in AVTOVAZ at 25%.

In AVTOVAZ declined to comment, Renault-Nissan Alliance on the request is not answered.

And here again

In a similar situation AVTOVAZ was in 2009, when its net loss amounted to 49.2 billion rubles, twice the previous year. In October 2009, the group had to refinance its loans and borrowings at 47 billion rubles, redeemable until June 30, 2010. Then the plant had to be rescued at public expense.

In spring 2009 the government has allocated “Russian technologies” 25 billion rublesto transfer this amount in the form of interest-free loans to AVTOVAZ for a period of a year. After that, the state gave AVTOVAZ to 12 billion roubles for calculation with creditors. In December AVTOVAZ was granted a loan in the amount of 28 billion rubles.

In the spring of 2010, first Deputy Prime Minister Igor Shuvalov estimated the total amount of state support of AVTOVAZ to more than 70 billion rubles.

Will the factory to reduce staff?

In addition to attracting additional funding, management of AVTOVAZ should focus primarily on improving the efficiency of production, said Bespalov from “VTB Capital”. Most likely, this means that the company will continue the optimization of personnel, says the analyst. Over the past two years the number of employees decreased by almost 20 thousand employees, up to 50 thousand people.

The Chairman of the trade Union of AVTOVAZ, Sergei Zaitsev in early February reported that “excessive strength in the enterprise is more than 4 thousand people from the total population of 44.5 thousand,” that is, remain unclaimed for about 10% of plant employees.

Will I have to spend on the rescue of AVTOVAZ, the state money?

None of the shareholders of AVTOVAZ to the government for help is not addressed, said a source in the government.

The current situation is not similar to 2009. Then AVTOVAZ was saved by the government because it was government, and now is a private company controlled by a foreign shareholder. In addition, the state has now simply no money. Now the government is preparing to revise the budget for 2016, in the beginning of the year in the White house and President Vladimir Putin discussed the possibility of reducing the expenditures by at least 10%, but final decisions have not been.

The state of the economy this year will be implemented in the framework of anti-crisis plan, a funding source which are called the reserved budget funds. The total cost of the plan so far is estimated at about 900 billion rubles In the first versions of the plan that was discussed with President Vladimir Putin on 10 February, targeted assistance to AVTOVAZ was not provided. The Ministry was not informed whether AVTOVAZ included in the plan as a result of his improvements until 18 February. In the Ministry of industry and trade on the inquiry did not answer.

Government sources say that reports of financial problems at AVTOVAZ was not unexpected. Pre-emptive action to prevent the growth of unemployment in the Samara region has not yet been taken and “all hands on deck on this topic, there,” the official said. AvtoVAZ is not specifically dealt with at the last meetings of the interdepartmental Commission on monitoring the situation on the labour market, which is governed by social Deputy Prime Minister Olga Golodets.